401K compound interest calculation

Discussion in 'Financial Planning' started by Steve.S.Walker@gmail.com, Jan 6, 2007.

Guest

Hi...

Can someone recommend a site, or an excel download that will help me
estimate my 401K growth over time, including an employer match? I
found quite a few, but the problem is they only allow a 100% employee
match, and my employer matches 8% for my 2% of my salary (they're very
generous).. I'd like a calculator that figures in my annual raises,
plus my annual rate of return, etc. Bloomberg has a good one, but it
limits the employer match to 100%... Also, if I have to do a formula
myself, do I perform the compound interest calculation monthly?
quarterly? Any ideas?

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wrote:
> Hi...
>
> Can someone recommend a site, or an excel download that will help me
> estimate my 401K growth over time, including an employer match? I
> found quite a few, but the problem is they only allow a 100% employee
> match, and my employer matches 8% for my 2% of my salary (they're very
> generous).. I'd like a calculator that figures in my annual raises,
> plus my annual rate of return, etc. Bloomberg has a good one, but it
> limits the employer match to 100%... Also, if I have to do a formula
> myself, do I perform the compound interest calculation monthly?
> quarterly? Any ideas?
>
> Thanks.

I sent Steve a copy of the spreadsheet I have on my personal site. FWIW,
it allows entry for total percent going in, i.e. the sum of the employee
deposit and employer match expressed as one number, for Steve, 10%.
I don't compound monthly, we always talk here in terms of annual rate of
return, and a 40 or so line sheet is easier to glance at in terms of
changes to salary or impact due to a raise of the percent saved.
Calculators that skip the 40 years' numbers and only show an end result
are useless to my way of thinking, it's better to see the amount saved
each year to tell if you're on track. For example - Given the numbers
15% total saving, 3% annual raise, 8% return, one has 20X after about 42
years of work, but only 5X after 21. The full sheet shows the power of
compounding in the last decade. Happy to forward or post a downloadable
copy.

What I dont understand here is how did they arrive at this rate of
return? Also it seems that "Change In Market Value" include the
"Dividends & Interest" value?

My confusion arises from the fact that my personal rate of return comes
as 22% when I include last years figures. And I cant believe that rate
of return on my investments!!

Please help me understand fidelity's "Rate of Return" or let me know
good way to calculate that on yearly basis.

Thanks.
Samsai

On Jan 6, 9:43 am, joetaxpayer <> wrote:
> wrote:
> > Thanks.I sent Steve a copy of the spreadsheet I have on my personal site. FWIW,
> it allows entry for total percent going in, i.e. the sum of the employee
> deposit and employer match expressed as one number, for Steve, 10%.
> I don't compound monthly, we always talk here in terms of annual rate of
> return, and a 40 or so line sheet is easier to glance at in terms of
> changes to salary or impact due to a raise of the percent saved.
> Calculators that skip the 40 years' numbers and only show an end result
> are useless to my way of thinking, it's better to see the amount saved
> each year to tell if you're on track. For example - Given the numbers
> 15% total saving, 3% annual raise, 8% return, one has 20X after about 42
> years of work, but only 5X after 21. The full sheet shows the power of
> compounding in the last decade. Happy to forward or post a downloadable
> copy.
>
> JOE

The rate of return on the average amount invested was
13.6% = $4,219.20/$31,034.42

This is just a simplified approximation of the real
calculation to sanity-check Fidelity's calculation.

To do the real calculation one would need to know the
exact dates and amounts of your contributions and your
employer's contributions. With those in hand, one would
then run the Internal Rate of Return algorithm on those
cash flows (if you have Excel, you can load in its
analysis toolpack and then you'll have access to the
IRR() and XIRR() functions and can do the calculation
yourself).

I will try to remember that this is continuous contributions type
investment and hence the calculation is little different/
complicated...

I have heard that people try to achieve on a yearly basis 8% or more
returns on 401K... they say if you maintain this rate of return over
time, then you are on right path... since I started my 401K few years
back, the market has been UP in general...

is 8% target achievable in bad years? I know it depends on the market,
but experienced people can shed light on historic returns or share
their experiences.

samsai wrote:
> I have heard that people try to achieve on a yearly basis 8% or more
> returns on 401K... they say if you maintain this rate of return over
> time, then you are on right path... since I started my 401K few years
> back, the market has been UP in general...
>
> is 8% target achievable in bad years? I know it depends on the market,
> but experienced people can shed light on historic returns or share
> their experiences.
>
> Thanks in advance.
> - Samsai

The simple answer is 'no'. This is a variant on the Risk/Return
question. If you got 8% in a bad year, well, it wouldn't be bad, right?
The 8% goal is achievable over time, I would think. The average return
for the S&P has been over 11% for the past 40 years, and there's enough
argument in favor of lower returns for the next 10-20. The 11.4% to be
precise brought with it a 16.3% standard deviation. This simply means
that about 2/3 the time the return was 11.4% +/- 16.3% and that 1/6 of
the time, worse than -4.9% and 1/6 the time it was greater than 27.7%.

By diversifying, adding small cap, foreign funds, and bonds (this is not
a complete list) you improve the return a bit, but more importantly,
reduce the standard deviation. Modern Portfolio theory and specifically,
the Efficient Frontier address this better than I can in one paragraph.http://en.wikipedia.org/wiki/Efficient_frontier is a decent overview of
this.
I can also refer you tohttp://www.moneychimp.com/articles/randomness/time_horizon.htm
which I recommend for two reasons. You can see how the market performed
in any year you choose, and how your risk is lessened as your time
horizon is lengthened. If you enter a decade at a time, e.g.. 1980-89,
you'll see how the 90's (and 80's for that matter) were an anomaly, as
one would expect to have about one down year in three, or 3 per decade.
Don't plan your future based on the 90's (I've give my right pinkie to
have a decade like that again), but hopefully, the 70's are too
pessimistic. I can suggest that you keep reading, I have a reading list
on my web site, and continue to add to it as good books come to my
attention. All books on the list are books I've read. Elle has good
links to sites about diversifying, also worth a look:http://home.earthlink.net/~elle_navorski/index.html

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